The Insolvency Service has released its annual figures on personal insolvencies which show that in 2019, there were 122,181 personal insolvencies, an increase of 6% on 2018, and the highest annual total since 2010. This was mainly due to an increase in Individual Voluntary Arrangements which reached their highest year on record.

Personal insolvencies fell 4.3% from Q3 to Q4 2019, and are 15.6% lower than in the same quarter in 2018.

Commenting on the figures Duncan Swift, President of insolvency and restructuring trade body R3, said  “Personal insolvency numbers in 2019 were the highest they have been since 2010. This reflects a tough year for personal finances.”

“Individuals have benefited from low inflation, real wage increases, and record employment levels, but this has been counter-balanced by rising consumer debt and the fact that not all employment is secure. For the most financially vulnerable, the problems with the benefits system have been well-publicised.”

“Finances are stretched for many, and financial resilience is low. It doesn’t take much of a shock – a missed benefit payment, an unexpected bill, or a reduction in hours – to cause financial problems. Real wages are rising, but having fallen for so long before that it’s a bit too late for some, while wage increases will not be evenly distributed.”

“Banks and other lenders have continued to tighten their credit standards in response to the Bank of England’s concerns around consumer over-indebtedness, which means many people have lost a fall-back option they may have used in the past.”

“The length of time consumers have to repay zero interest credit cards has shortened, which may partially explain why consumer credit card repayments overtook new borrowing at the end of last year, for the first time since 2013.”

“It is worth remembering that insolvency procedures are only a rough guide to the true scale of individual indebtedness in the UK. Often, the question is about access and whether someone who is unable to maintain their level of debt can meet the criteria to enter an insolvency procedure. The personal insolvency figures are only part of the picture showing the true level of serious financial trouble for individuals.”

“Although increasing indebtedness is a factor in rising Individual Voluntary Arrangement numbers, market factors, such as the ability of practices to handle large numbers of cases, also play a role. Bankruptcy and Debt Relief Order numbers don’t really have the same issue and it is therefore notable that both bankruptcy and Debt Relief Order numbers have been moving up – albeit slowly and inconsistently – over the last few years. Bankruptcy numbers are now the highest they’ve been since 2014.”

“There are measures being taken by the Government to help people in financial distress. The ‘breathing space’ for people in debt is due to be introduced next year, and will give indebted people a 60-day period free from creditor action to seek qualified advice as to the best way for them to resolve their situation. R3 has campaigned for the breathing space for many years and we are very pleased to see that it is nearing its launch.”

Bankruptcies increased last year compared to 2018 to 16 ,702 while debt relief orders decreased slightly to 27,497.

Louise Brittain, Partner, Restructuring and Insolvency at Wilkins Kennedy said “Debt relief orders are for people who have under £20,000 in debt, but the fact they have had to go down the route of bankruptcy or Individual Voluntary Arrangements could be an indication that consumers are running up greater debt than £20,000 in unsecured debt such as loans or credit card debt so the burden of debt is rising.

“The cost of creditors applying for bankruptcy proceedings has also massively increased so unless creditors think they are going to get their money back, they are not pursuing their debts because the cost is too expensive.

“Creditors are focusing more on pursuing individuals through other avenues such as bailiffs.”

StepChange Debt Charity meanwhile says that the Insolvency Service figures indicate that the number of new Individual Voluntary Arrangements (IVAs) arranged in 2019 continued to rise, but so did the proportion of IVAs failing in their first year.

IVAs are a form of insolvency solution, registered with the Insolvency Service. They can be the right debt solution for the right people, and the charity recommends them to clients whose circumstances make them suitable. However, StepChange is warning that the failure rates within the wider market should ring alarm bells and suggest that the bar needs to be raised further on regulation.

The Insolvency Service reports that, across the market as a whole:

  • The total number of IVAs arranged in 2019 was 77,973, up from 70,796 in 2018.
  • The proportion of IVAs that failed within their first year rose from a recent low of 4.1% in 2013 to 8.4% in 2019, the highest proportion since 2002. The equivalent figure for IVAs arranged through StepChange was 2.6%.

StepChange Voluntary Arrangements (the charity’s subsidiary that sets up IVAs) arranged 1,226 IVAs, down from 1,346 in 2018. This accounted for 1.6% of the market, down from 1.9% in 2018.

For the first time, StepChange Voluntary Arrangements has decided to publish its own IVA performance data. This demonstrates a markedly lower termination rate than the market as a whole. While some IVAs will always terminate early despite all best efforts, the charity is concerned that such wide disparity implies some elements of poor market practice in some quarters, exacerbated by the patchiness of regulatory oversight, which are setting some people up to fail when they enter into an IVA. This matters, because if an IVA fails it can prove very expensive, potentially leaving people in a worse position than before.

Typically, IVAs [see note 2] are set up to run for five to six years. During this period, people stick to an affordable repayment schedule agreed with their creditors, who freeze any further charges and interest, and on successful completion of the IVA any remaining debt is written off – a very effective way of balancing the interests of the lender and the insolvent borrower in difficult circumstances.

However, if the IVA terminates early, lenders can re-impose any or all of the frozen interest and charges. Given that the typical set up cost of an IVA is over £1,000 this means that if an IVA fails, especially at an early stage, then it can prove to be very expensive for the person who took it out, as all the payments they make into the IVA in the early months may go towards paying to the setup costs. In addition, they lose the protections and benefits that the IVA provided. This is why it is important that providers advising on and setting up IVAs take every possible step to check that the client’s circumstances make an IVA suitable and affordable for them, and likely to remain so over the IVA period.

The chart below shows the proportion of IVAs that terminate very early in the market as a whole, and the equivalent proportion for those set up by StepChange Voluntary Arrangements.

The regulation of IVA providers is not straightforward. While all IVAs must be set up under the supervision of a suitable qualified Insolvency Practitioner, these practitioners are regulated by a number of different professional bodies. The number of IVAs that the Insolvency Practitioner supervises can vary significantly – from a few hundred to many thousands of cases The Insolvency Service has recently consulted on the regulation of IVAs, and the outcome of this consultation is eagerly awaited. StepChange looks forward to contributing constructively to further debate on how regulation can address some of the more problematic elements of market practice.

There will always be some cases where IVAs terminate early due to changes in circumstances. However, the wide variation in failure rates suggests that market practices may be driving poor outcomes for some people in debt who could be being poorly advised to take out IVAs that should be identified at the outset as posing a high risk of failure.

Peter Tutton, StepChange Head of policy, research and public affairs, said “The worrying trend in relatively high failure rates suggests that the IVA market is not doing enough to protect people from the harm that can result when an IVA fails. Our concern is that the regulatory system is not sufficiently robust to ensure that the pursuit of profit does not trump good practice, especially in terms of referral fees and lead generation. Further work is needed to ensure that the risk of IVAs failing is minimised.”

Peter Wordsworth, Head of StepChange Voluntary Arrangements, said “In publishing our own performance data and making it transparent, on a voluntary basis, we hope we are taking a lead for the large volume providers to follow. People considering taking out an IVA need to understand that it can be an excellent solution – but only if it is the right one for the individual, and if the chances of it completing are very high. It seems entirely reasonable that people should be able to compare how successfully the IVAs that individual providers arrange perform compared to the market as a whole.”